C.H. Robinson’s stock price may have risen Thursday at a rate higher than gains in the S&P 500, but it was definitely not because analysts had much good to say about the 3PL giant’s earnings or outlook.
A day after C.H. Robinson (NASDAQ: CHRW) came in short of estimates on revenue and profits, virtually every analyst following it put out a report expressing little expectation that pain at the company was going to be short-lived.
Despite that, C.H. Robinson closed up 2.25% Thursday to $104.37. But in the immediate aftermath of the earnings report Wednesday, the stock declined more than 4% in post-market trading. It traded as high as $106.72 on Thursday.
Those who follow Robinson appeared stunned at the bad news surrounding its Global Forwarding business, which was the primary reason for the company’s poor performance. While comparisons during the pandemic for freight companies are problematic because they can be for two quarters with wildly different markets, the bottom line was that net income at C.H. Robinson in Q4 was down more than 58% from a year earlier. Global Forwarding — which manages international air and oceangoing freight — was the primary culprit.
“We had expected Forwarding to mean revert back toward 2019 levels during the course of 2023 but did not expect it to happen all at once,” the transportation research team at Morgan Stanley, led by Ravi Shanker, said in its post-earnings note to investors.
Interim CEO Scott Anderson expressed a similar sentiment about the speed of the Forwarding segment.
“While the correction in the freight forwarding market was certainly expected, the speed and magnitude of the correction in only two quarters was unexpected, with ocean rates on some trade lanes already back to pre-pandemic levels,” said Anderson, according to an earnings call transcript.
While the North American Surface Transportation (NAST) group turned in a mixed performance — with an increase in net profit driven primarily by the gap in what it paid to acquire freight versus what it paid to have it moved — the Morgan Stanley team said “we believe cyclical pressure to come at NAST as well. Changes are underway but won’t be easy and until then (approximately) $4 (per share) looks like normalized earnings per share.” C.H. Robinson’s full-year EPS in 2022 was $7.48 but with just 81 cents of that coming out of the fourth quarter.
A stated lack of urgency in finding a new CEO to replace ousted CEO Bob Biesterfeld at the start of the year also unnerved several analysts.
“Until a new CEO is named and that individual can outline their plan to put CHRW back on track to drive through cycle earnings growth, we have a hard time seeing how the stock can move sustainably and/or materially higher,” a note from Stephens analyst Jack Atkins said.
A similar sentiment came from Bascome Majors at Susquehanna International.
“Multiple comments on yesterday’s call seem to confirm our fears that both the CEO search and
rollout of any meaningfully new strategy could take much longer,” Majors wrote.
Anderson and other C.H. Robinson executives on the analyst call made multiple references to the strategy implemented by Biesterfeld — one of smaller head count and greater emphasis on technology — as still in place.
“I believe in the strategy that the team is executing on to deliver a scalable operating model,” Anderson said.
Jason Seidl of Cowen & Co., whose report was as pessimistic as most other analysts, did say he heard some signs of a bottom in the Global Forwarding group in some of the comments from C.H. Robinson executives.
“We model sequential improvements to the segment’s top line starting in Q2, as inventory restocking potentially resumes,” Seidel wrote. “We were encouraged to hear that CHRW expects forwarding revenues to remain above 2019 levels. On a comparable basis, however, we expect forwarding to face an increasingly tough 1H.”
But overall, Seidl wrote, “we see a long path ahead of CHRW.” Seidl had downgraded the Cowen rating on C.H. Robinson to “market perform” from “market outperform” in January.
The spreads on stock price targets for the 3PL are wide. Cowen’s downgrade gave it a target of $91, down from $106. At Merrill Lynch, analyst Ken Hoexter has an $88 target. But at Morgan Stanley, the target is $64 and with that comes an underweight rating. The target had been $67 but was reduced after the earnings report.
Whoever moves into the CEO role will face the reality of an activist investor, Ancora Advisors, which last month signed a one-year extension of a standstill agreement that put two Ancora representatives on the C.H. Robinson board but with the promise that Ancora would not seek changes at the company for at least another year. The extension from January was preceded by an earlier standstill agreement.
The poor performance of the Global Forwarding business creates some problems for C.H. Robinson, according to several analysts. They said a sale of that business might have been an option for C.H. Robinson management under the type of restructuring Ancora is seeking.
“Strategic actions seem off the table,” Morgan Stanley wrote. Noting that divesting Global Forwarding was seen as a potential way of meeting Acora’s goals, along with a ramped-up repurchase of stock, Morgan Stanley said “both of those options look unlikely” following the results.
“For starters, the rapid unwind of Forwarding results likely keeps potential buyers at bay until the dust settles,” Morgan Stanley wrote. “In addition, management seemed to imply that Forwarding remained a core part of the business together with NAST as they had a good
opportunity for cross-selling, and while there is room for improvement, progress has been pretty good so far.”
Specifically, CFO Mike Zechmeister on the call said the company has “seen some great opportunities from a cross-selling standpoint between the two. If you look at the last 12 months, we’ve had over half our revenue (adjusted gross profit) come from customers who use both [NAST and Global Forwarding].”
In other commentary about the market, Zechmeister said C.H. Robinson is expecting a 16% drop in the spot price of truckload capacity this year compared to 2022, with most of the decline coming early in the year. In 2022’s fourth quarter, the company’s contract-to-spot ratio was 65% to 35% in favor of contract, compared to a 55%-45% mix in favor of contract in Q4 2021.
The current market is also notable for a drop in available freight.
“We’re bidding competitively, and we’re feeling pretty good about the win rates,” Zechmeister said on the call. “But the demand and the volume there from the customer just isn’t strong. So even with our higher win rate from a bid standpoint, the volumes that are materializing are still challenged.”
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